January 27, 1982
Summary
The business recession continued in the Seventh District on
a broad front through the fourth quarter and into January. Output,
new orders, and employment declined further in most manufacturing
industries. Severe weather in January caused hardship and hampered
business operations in various areas. Sales of general merchandise
firms improved significantly late in the Christmas season and in
early January, in response to promotions and price discounts. (Bad
weather depressed sales in some areas later in the month.) Price
discounting also is widespread in wholesale markets for materials
and components. Housing activity is almost nonexistent. Agricultural
conditions remain very depressed, but there is hope that December
marked the low point for farm prices. Farmland prices have softened.
The upturn in interest rates since late November has depressed
credit demands, but business borrowing at large banks was strong in
December.
The Outlook
While forecasts vary significantly, most analysts in
the region believe the decline in activity will end some time in the
spring, followed by at least a modest uptrend in the second half.
Several reasons are offered. The lead role probably will be played
by consumers with buying power augmented by tax cuts starting July
1. Excess inventories are being eliminated by price discounting and
production cutbacks. A slower underlying rate of price inflation,
aided by union wage and benefit concessions, will improve business
confidence. Defense procurement, although not a major factor in the
district, will provide some stimulus. Backlogs of deferred demand
for housing, consumer durables, and some producer equipment are
building up. Accelerated depreciation under the new tax law will
help capital outlays. Translating backlogs of demand into sales and
orders probably will depend on a reversal of the recent upturn in
interest rates, which most analysts anticipate.
Inflation
Published price indexes probably do not fully reflect
recent price cutting, for both producer and consumer goods. But the
recent slowdown in inflation may be temporary. Electric and gas
utilities are seeking large increases, and many manufacturers and
trade firms will raise prices at the first favorable opportunity.
Inventories of materials and components are at such low levels that
any upturn in demand would spark price increases.
Consumer Purchases
Sales of vehicles, furniture, and appliances
remain very weak, but most general merchandise stores reported
significant strength in sales just before and after Christmas.
Although consumers responded to bargain prices, inventories remain
somewhat excessive. Airlines report improvement in traffic starting
in December. Some analysts fear that vigorous promotion of IRA
accounts will draw away consumer dollars.
Employment
Employment has been declining faster in the district
than in the nation. In November, wage and salary employment in
district states was 3 percent below November 1978 and manufacturing
was off 13 percent. Indiana, Iowa, and Michigan have suffered the
largest job losses. Layoffs in the motor industry and construction
have been most significant, but layoffs also have been mounting in
capital goods industries. White collar jobs are affected
increasingly. Some state and local governments are reducing
employment, reversing a steady rapid rise in the 1960's and l970's,
mainly because of cuts in federal programs.
Plant Closing
Many industrial plants have been closed in recent
weeks to cut finished goods inventories, and many others are on
short workweeks. Hopefully, most temporary closings will end as
scheduled later this month or in February. Some plants have already
reopened. However, certain freight car plants have been closed with
no schedule for reopening. Several plants in the meat packing, motor
and cement industries have been closed permanently.
Packaging Materials
Orders for steel and plastic strapping, and
paperboard for boxes, were very weak in late 1981, and apparently in
January as well. Demand for these products parallels manufacturing
activity in a broad range of industries. Inventories of paperboard
rose suddenly as demand dropped off.
Labor Negotiations
Management and unions in various hard-pressed
industries are engaged in negotiations to scale down compensation,
or at least to slow increases. Restrictive work rules are under
review. So far, confirmed concessions have been most significant in
the auto, meat packing, and airline industries. A bitter struggle
lies ahead over industry "take away" demands. The most important
discussions are in the bellwether motor industry where management is
seeking drastic modifications of the existing contract.
Capital Goods
Contracts for new industrial buildings, and new
orders for capital goods, suggest a sharper decline in capital
spending in the district than the 0.5 percent decline indicated by
the recent government survey. Faster depreciation and other new
investment incentives will have an impact, but only after confidence
improves and margins of excess capacity are narrowed. Capital
spending programs are dominated by projects intended to cut energy
costs, e.g. continuous casting installations in the steel industry.
Motor Vehicles
Sales of cars and trucks continue at severely
depressed levels. The first quarter auto output schedule of only 1.4
million, may be cut again. Inventories are at an all time high in
terms of days supply.
Steel
After showing strength last spring, steel demand slowed in
the second half of 1981, and December marked the low for the year. A
pickup in demand expected for January has not materialized, and no
improvement is now seen before March. User inventories of steel are
low and would have to be replenished if durable goods sales revived.
Construction
After a slight easing in availability of mortgage
funds in November and early December, the market tightened again.
Very few new loans are being negotiated at quoted terms of 17-18
percent or more, plus three points, with 20 percent down. New home
construction is at a virtual standstill. Nonresidential construction
prospects also are bleak, but permits have been approved recently
for several additional large office buildings in Chicago's Loop
area.
Agriculture
Two years of depressed farm earnings, with little hope
of a near-term recovery, has led to weakness in district farmland
markets. Reports from many areas indicate little buyer interest at
current prices. Our latest survey of agricultural banks shows an
average decline of 3 percent in district farmland values during the
fourth quarter, with weakness most apparent in Illinois, Indiana,
and Iowa. However, with farmland prices in the region four times the
level of 10 years ago, equity in land provides a basis for coping
with a prolonged period of depressed earnings for most farmers.